Business Ethics and Corporate Governance Essay
The Health South Corporation is a public company based in Birmingham City of Alabama, and at the moment, enjoys the status of one of the US’ largest dealers in the business of health care services provision. Presently, the Health South Corporation remains renowned for the rehabilitation services. Similarly, the health care services company has under its possession, over 200 facilities in America and Puerto Rico. The clout of the Health South Corporation is also seen in the fact that it has 100 inpatient rehabilitative hospitals; 60 outpatient satellite facilities meant for the sustenance of rehabilitative purposes; 15 long-term acute healthcare hospitals and other 25 home health agencies.
When the Health South Corporation reached its zenith, it registered approximately 4.4 billion US Dollars in revenue. At this moment, the company curved itself a niche away from its peers as the dominant organization in the market of rehabilitation services provision also. Currently, the Health South Corporation had under its roll, approximately 52,000 employees working in the 2,000 facilities which were situated in every state of America. Other employees were scattered in other countries, working for the Health South Corporation international branches situated in the United Kingdom, Australia, Canada, Saudi Arabia and Puerto Rico.
The Nature of Health South Corporation as an Ethical Issue
Going by the account provided by Baldwin-Ragaven, London and Jeanelle du Gruchy (1999), at the heart of the scandal were the incriminating facts that the Chief Executive Officer (CEO) of the company, Richard M. Scrushy had directed the company employees to make false reports, exaggerating grossly, about the company’s earnings as a way of meeting the company’s stakeholders’ expectations. Besides this, the move was seen as an artifice to ensuring the controlling of the company’s stock prices.
According to Markham (2005), these accusations were formally launched on March 19th 2003 as both the founder and the CEO of the organization became repeatedly accused by the American Securities and Exchange Commission (SEC) of conducting an accounting scandal bordering on falsely inflating the company by 1.4 million US Dollars. Prior to the above development, the CEO, Mr. Scrushy facilitated the act of overstating the company’s income by as much as 4700%. In this wavelength, the 1.4 billion USD herein stands for a value exceeding 10% of the Health South Corporation’s total assets.
According to Baldwin-Ragaven, London and Jeanelle du Gruchy (1999), in June 2005, the outcome of the affair had Scrushy being acquitted of all the 36 counts of accounting frauds; including the count of breaching the Sarbanes-Oxley Act- an act which seriously cast misgivings and aspersions on the credibility of the ruling. Nevertheless, exactly a year after the ruling (June 2006), Scrushy, the former Health South Corporation CEO succumbed to conviction on charges bordering on bribery, following the fact that he arranged a 500,000 USD in his campaign so as to secure for himself, a seat in a state health care services institutions regulatory board.
How to Prevent the Recurrence of Unethical Behavior in the Health South Corporation
Jeyaratnam and Chia (2004) quip that following the above developments, there are measures which were implemented to ensure that the same ethical issue of the accounting scandal does not recur. First off, measures were swiftly made in place to ensure the exiting of the Health South Corporation top brass who were in office at the time of the scandal. To this end, the CEO and Chairman, Mr. Scrushy, together with his CFO Bill Owens were all shown the door as a way of alleviating the scandal’s ghosts. In addition to this, to ensure a total overhaul, the company elected new Board of Directors. It is this new Board of Directors which together with the departmental heads and the rest of the staff elected Robert P. May as the Acting CEO and Joel C. Gordon as the new Health South Corporation chairman.
In the same wavelength, it is important to take to stock, the bifurcation of the functions of the Health South Corporation CEO by the new board of directors. This follows the fact that the new board, through its organizational ethics and managerial acumen, ascertained correctly that vesting too much power on the CEO was a perfect ingredient to corruption and conflicts of interests as the powerful CEO would be prone to misusing the large sphere of influence at his disposal. To this effect, in order to diffuse off the danger, the office and functions of the CEO and the Chairman were severed so that May was the CEO, and Gordon, the Chairman.
According to Grant (2000), another radical institutional change that the new Board of Directors set in place as a way of assuaging the chances for the recurrence of the scandal was to reorganize and strengthen the Health South Corporation internal audit department. To this effect, among other measures, the Board of Directors, totally intent on warding off corruption, made changes to ensure that this internal audit department enjoyed unfettered accession to all the records and systems belonging to the company.
Alongside this act, Health South Corporation appointed a senior vice president of this internal audit department. Just like this department is granted autonomy, this vice president exerts the power to make internal reports to the Board of Directors and the audit committee, without needing to solicit the consent of the CEO and the Chairman. This provision makes it possible for whistle blowing in the case of any anomaly materializing.
In addition to the above measures, the new Board of Directors reorganized and strengthened the Health South Corporation’s accounting organization by taking to commit the all the substantial resources as a away of improving the quality of the personnel. At the same time, the move was geared at improving the segregation (or specialization) of roles together with internal controls which are relatable to the accounting functions- Jeyaratnam and Chia (2004).
In another token, the company ensured the implementation of improvements in the manner in which the financial statements could be disclosed. To this effect, the controls and the procedures thereof became more institutionalized, with the departmental unit involved in this effort being made autonomous, having its own employees or foot soldiers.
Leder (2003) maintains that in the face of all these changes, the Health South Corporation witnessed major upgrades for the information systems being implemented by the new Board of Directors, together with the IT sector. This effort was geared at improving the operations of the Health South Corporation and also to bolster the art of reporting. At the same time, the sacrosanct nature of the above development is that it set precedence whereby the rank and file of the organization was bequeathed with the chance to access into the financial database of the company.
To the best of Forbes’ (2000) knowledge, the company has also adopted the use of a revised and revamped compliance program. This includes all the newly revised standards regulating the business conduct, as a way of reinforcing the company’s dedication to, and concomitance with the laws and regulations in entirety, and all the standards of good corporate governance, alongside an array of significant organizational changes which are compliance-related. In this effect, organizational ethics for the Health South Corporation employees binding the managerial sector, together with the grassroots became well spelt out, with the repercussion of contravening these regulations also occurring juxtaposed to these laws.
As if all the aforementioned changes are not enough, it is important to note that through the efforts of the new CEO, Chairman and the Board of Directors, the company conducted thorough reviewing of the Generally Accepted Accounting Principles (GAAP) Act’s applicability to the management and use of this health care service providing institution’s statements of accounts. To this end, all the disclosures of the financial statements are to be ancillary to the principles of the GAAP, especially in the event of there being a misspelling, an error of omission or commission in the accounting records.
Leder (2003) maintains that perhaps among one of the mostly hailed action that the Health South Corporation Board of Directors have taken to implement is the taking to hire outside resources to ensure the supplementing of the of the accounting roles and functions. To this end, the outside resources help in preparing consolidated financial records or statements and other related disclosures. It is on this backdrop that the Health South Corporation exploits the services of external auditors as the end of each fiscal year nears.
As an integral part of the effort to ameliorate the disclosure procedure and controls, the company as a way of complying with the recommendations of the SEC completed the distribution of disclosure procedure and controls policies. To ensure maximal chances for success, the Health South Corporation CEO, Chairman and the Board of Directors made a construction of the disclosure committee which consisted of employees who have a substantial role in the public disclosure process and the members of the executive management team.
The idea that the above-discussed corrective measures have been instrumental in turning around the company’s negative situation (a feat which very few firms have been able to achieve), is clearly elucidated by the fact that By about June 2006, Health South Corporation had already made a completion of its recovery plans. In addition to this, under the symbol HLS, the corporation went on to re-list its stock in the New York Stock Market.
Nevertheless, the Health South Corporation was also compelled to make changes of non-financial nature. For instance, as opposed to the former times which had seen the company operate surgery centers, diagnostic divisions and a myriad of outpatient rehabilitation services, the Health South Corporation at the moment only specializes in the inpatient rehabilitation services. This overhaul and attenuation of the variety of brands dealing with the provision of an array of health care services was an artifice to ensure the recovery of the organization, following the scandal which threatened to rip up the company right from its top to the bottom.
Baldwin-Ragaven, L., London, L. and Jeanelle du Gruchy, J. (1999). An Ambulance of the Wrong Color: Human Rights and Health Professionals. California: Juta and Company Limited.
Forbes, C. (2000). The Health South Corporation. California: Forbes Inc.
Grant, T. (2000). Company Histories and Health South Corporation.
Clairton: Pennsylvania State University.
Jeyaratnam, J. and Chia, S. (2004). Occupational Health and National Development. Washington: World Scientific.
Leder, M. (2003). The Financial Print in Uncovering A Company’s True Value.
New York: John Wiley and Sons.
Markham, J. (2005). Financial History of Modern US Corporate Scandals
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